“Despite the bearish undertone to this week’s close, not much has really changed in the markets over the last few weeks. We continue to probe the boundaries of our bear flaggish pattern as the markets come to terms with our new price neighborhood. While many bulls are understandably frustrated or worried that we stalled out this week, as I mentioned a couple of weeks ago it was highly unlikely that we would have a V shaped recovery back to our highs in a couple of weeks.”
That was the intro to last week’s review, and as befits our markets indecisive behavior, it basically still applies to this week’s action as well. We have yet to make any kind of definitive move out of our current price levels and continue to erratically bounce and drop as we approach our near term boundaries.
Looking at a chart of the SPDR’s S&P 500 etf (SPY), we can clearly see that we are still mired in a rather large bear flag. While we were able to find some support into Friday’s close and stay well above Tuesday’s strong reversal candle, it is very important to note that we failed in holding above the 20 day moving average and fell quite short of last week’s topping candles before we turned back down towards the bottom of our short term channel.
This price action has bearish implications and suggests furthur movement to the downside. Tuesday’s lows just above $114 now become the new line in the sand for bulls to defend. If SPY cannot hold that level, it would likely suggest a retest of our recent lows. On the positive side, the markets have seen some reduction in volatility as we continue to slowly meander upwards in this ascending channel. If the bulls can reclaim the 20 day moving average while seeing a further reduction in volatility, this flag could become a nice launching point for a rally back towards the bottom of our previous range.
We remain in a precarious place in the markets right now and traders should continue to maintain a cautious posture as they wait for a better environment to appear.
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